The financial services industry has faced new challenges since the global downturn and has been forced to change on different levels. One change we have seen developing over the last few years has been banks deploying new technologies and focusing their efforts on digitalisation strategies, a movement catalysed by FinTech companies entering the market with a customer-centric approach and a focus on leveraging new technologies. With a hastened pace of change, regulatory questions are important for all to address, as compliance lies at the heart of the successful deployment and scalability of these new solutions.
What is RegTech?
Aiming to support the deployment of these solutions, we have seen the emergence of regulatory technology (RegTech) companies. The first reference to RegTech was made in a UK government report in 2015. The terminology has since spread globally and now refers to firms that help other companies understand and navigate regulation, as well as create and/or automate compliance processes. RegTechs offer more efficient and cost effective solutions compared to the internal infrastructure that most companies have in place, since they rely on technologies such as cloud infrastructure and advanced data science (e.g. algorithms, machine learning).
What does RegTech do?
Currently, RegTech addresses three main areas of the compliance conundrum:
- Keeping up with new regulation
Multinational companies are increasingly investing into capabilities that enable them to comply with the changing regulatory landscape. RegTechs, such as FundApps, a UK based start-up, help companies move their data to the cloud and validate its compliance globally against a rule library, enabling them to create complex reports using the data. The software also recognizes the format each regulator requires, making the report creation process more efficient.
- Performance issues
Most financial services companies have a multitude of legacy systems in place, while interoperability remains a major challenge as different systems often fail to communicate with each other due to data being stored in different formats. RegTechs, such as Atlassian, an Australian start-up, provide a single platform to help companies run audit reports. As these reports typically require data to be compiled from different systems and in different formats, collecting the necessary intelligence is often a lengthy manual process. RegTechs operating in this area provide platforms that facilitate the aggregation of the data across divisions as well as regions, significantly improving the efficiency of the process.
- Extraction and consolidation of data from multiple applications
The area of data storage, access and management is used primarily to comply with KYC (know your customer) and AML (anti money laundering) requirements. While legacy IT systems struggle to process and store an increasing amount of data, RegTechs offer a cloud-based infrastructure to enable companies to comply with KYC and AML regulations. For example, the data analytics and automation software of the Australian start-up Encompass analyses data from diverse sources and creates a single report from different perspectives (e.g. a firm, an individual, etc.).
What’s next for RegTech?
Today, RegTechs offer viable solutions to current problems in the above mentioned three areas. However, with an increasing number of players saturating the market, RegTechs will need to find new areas to focus on in order to stay competitive in the long term. Asset management is often identified as an area where RegTech could offer substantial added value due to the amount and complexity of regulation in this field. In the meantime, however, Blockchain is proving to be a technology which could make compliance more efficient for multinationals (e.g. in the areas of cross-border payments, KYC, etc.). Indeed, some FinTechs operating in this area are capitalising on the complexity of regulation, as their efficient technologies enable them to provide a better service than that of the incumbents. In light of this, FinTech could potentially be threatening the prosperity of RegTech firms in the future as an industry-wide shift to Blockchain could make regulatory technology in its current form redundant. Which way the RegTech space will evolve remains to be seen and we will be watching this segment closely to stay up to date with developments.